Coronavirus is increasing its impact on the world economy
Extraordinary FOMC meeting
The growth of gold
The main surprise of the week was an extraordinary FOMC meeting, where it was decided to reduce the interest rate by 50 bps at once. The regulator's actions are aimed at mitigating the negative effects of the coronavirus epidemic in the U.S. territory. The next day the Fed was followed by the Bank of Canada. The regulator cut the rate by 0.5%. But the active actions of the world's central banks have not yet managed to stabilize the market situation. Investors are actively selling risky assets on the news of the virus spreading in the EU, Great Britain, Asian and North American countries.
On the currency market, investors are still focused on the fall of the American currency. On Friday, the dollar index updated the 2-month minimum trading. During 5 trading days, the European currency strengthened against the dollar by more than 2.5%, while the pound rose by 1.3% and the Japanese yen grew by more than 2.5%.
The dollar was pressured by an unexpected decision of an unscheduled FOMC meeting (for the first time since 2008), which unanimously decided to reduce the interest rate by 50 bps at once. At the same time, the regulator did not rule out that the interest rate would be cut in the future in case of a worsening of the economic situation. According to CME Group, investors can safely assume that at the March 18 meeting the Fed will decide to cut the rate by another 50bp.
The Fed's decision fundamentally changes the balance of power in the market. The interest rate differential between the Fed and other global central banks has narrowed considerably, which encourages fixing the long positions on the American currency.
Among G7 currencies only Canadian dollar could not increase its advantage against the dollar. Following the Fed, on Wednesday the Bank of Canada reduced the interest rate by 50 bps, weakening the national currency.
Precious metals market
Gold remains the most attractive asset in the market. News about coronavirus spreading, decrease of dollar and yield of American traders help to increase long positions on gold. During the reporting week alone, precious metal rose in price by more than 7.5%. Since the beginning of the year, the growth was more than 11%. Only palladium shows a better result: +25% since the beginning of the year.
This week the market was focused on the OPEC meeting, where the issue of reducing production quotas was discussed. OPEC countries reached a preliminary agreement on Thursday to cut production by 1 million barrels/day. On Friday, the cartel countries tried to persuade Russia and other oil producers to cut production by 0.5 million barrels. But investors reacted coldly to the news and the market completed trading in the red zone. Many believe that with the global economy slowing down, these actions will not be enough to stabilize the market.
The stock market ended the trading with movement in different directions. European indexes closed in the red zone. Investors are selling risk assets on the background of reports about coronavirus spreading in the EU. The American market has completed trading with a slight increase. The market was supported in the middle of the week by the Federal Reserve and the adopted by Congress bill on the allocation of additional funding to combat the coronavirus. In the green zone, the Chinese indexes completed trading. Investors are reacting to the news about a daily decrease in the number of new virus infections.